To view the full product, including the scopeand methodology, click on the link above.For more information, contact David G. Woodat 202-512-8678 or firstname.lastname@example.org.Highlights ofGAO-04-280,a report to the
Chairman and Ranking Minority Member,Special Committee on Aging, U.S. Senate
Federal and State Agencies FaceChallenges in Combating PredatoryLending
While only one federal law—the Home Ownership and Equity Protection Act—is specifically designed to combat predatory lending, federal agencieshave taken actions, sometimes jointly, under various federal consumer protection laws. The Federal Trade Commission (FTC) has played the most prominent enforcement role, filing 19 complaints and reaching multimilliondollar settlements. The Departments of Justice and Housing and UrbanDevelopment have also entered into predatory lending-related settlements,using laws such as the Fair Housing Act and the Real Estate SettlementProcedures Act. Federal banking regulators, including the Federal ReserveBoard, report little evidence of predatory lending by the institutions theysupervise. However, the nonbank subsidiaries of financial and bank holdingcompanies—financial institutions which account for a significant portion of subprime mortgages—are subject to less federal supervision. While FTC isthe primary federal enforcer of consumer protection laws for these entities,it is a law enforcement agency that conducts targeted investigations. Incontrast, the Board is well equipped to routinely monitor and examine theseentities and, thus, potentially deter predatory lending activities, but has notdone so because its authority in this regard is less clear. As of January 2004, 25 states, as well as several localities, had passed laws toaddress predatory lending, often by restricting the terms or provisions of certain high-cost loans; however, federal banking regulators have preemptedsome state laws for the institutions they supervise. Also, some states havestrengthened their regulation and licensing of mortgage lenders and brokers.The secondary market—where mortgage loans and mortgage-backedsecurities are bought and sold—benefits borrowers by expanding credit, butmay facilitate predatory lending by allowing unscrupulous lenders to quicklysell off loans with predatory terms. In part to avoid certain risks, secondarymarket participants perform varying degrees of “due diligence” to screen outloans with predatory terms, but may be unable to identify all such loans.GAO’s review of literature and interviews with consumer and federalofficials suggest that consumer education, mortgage counseling, and loandisclosure requirements are useful, but may be of limited effectiveness inreducing predatory lending. A variety of factors limit their effectiveness,including the complexity of mortgage transactions, difficulties in reachingtarget audiences, and counselors’ inability to review loan documents.While there are no comprehensive data, federal, state, and consumeradvocacy officials report that the elderly have disproportionately been victims of predatory lending. According to these officials and relevantstudies, older consumers may be targeted by predatory lenders because,among other things, they are more likely to have substantial home equity andmay have physical or cognitive impairments that make them more vulnerable to an unscrupulous mortgage lender or broker.
While there is no universallyaccepted definition, the term“predatory lending” is used tocharacterize a range of practices,including deception, fraud, ormanipulation, that a mortgagebroker or lender may use to make aloan with terms that aredisadvantageous to the borrower.No comprehensive data areavailable on the extent of these practices, but they appear mostlikely to occur among subprimemortgages—those made toborrowers with impaired credit orlimited incomes. GAO was askedto examine actions taken by federalagencies and states to combat predatory lending; the roles playedby the secondary market and byconsumer education, mortgagecounseling, and loan disclosurerequirements; and the impact of predatory lending on the elderly.GAO suggests that Congressconsider providing the FederalReserve Board with the authorityto routinely monitor and, asnecessary, examine nonbankmortgage lending subsidiaries of financial and bank holdingcompanies to ensure compliancewith federal consumer protectionlaws applicable to predatorylending. Congress should alsoconsider giving the Board specificauthority to initiate enforcementactions under those laws againstthese nonbank mortgage lendingsubsidiaries.